Downer EDI, the engineering group, joined an exclusive club yesterday when it sprung a surprise on the market by revealing write-downs and losses of more than $250 million.
Downer shares crashed more than 27% on the news.
It joined the likes of Sonic Healthcare which suffered a 25% price fall in one day after it cut guidance last month and Virgin Blue, which saw its shares down 33% at one stage after it cut its 2010 earnings estimate last Friday.
The news saw Downer shares fall 20%, or $1.30, to a low of $4.97 in the morning, before they battled their way back to $5.10, down $1.17, or 18.6%, in the early afternoon.
But they then fell again, hitting a new day’s low of $4.56, a loss of $1.71, or more than 27%.
They then closed at $4.88, down $1.69, or 27%.
Downer said its NSW underperforming train carriages project required an additional $190 million write-down, while it will also book a $66 million impairment on other assets.
The costs and impairments were either non-cash or would be funded by existing capital, and full-year results will remain in line with guidance when these items are excluded, Downer told the ASX.
"Following a full review of the A$1.9 billion Waratah RSM contract, the company has identified the need to raise a provision of $190 million.
"Now that the project is sufficiently progressed for reasonable estimation to occur (30% project completion point), it is evident from the detailed review undertaken that the tendered estimates do not sufficiently provide for the full extent of the design development, review and approval processes and the consequential flow on cost and time impacts being incurred during the procurement and manufacturing phases of the contract.
"It is also of note that confidential commercial processes, entered into with the client, are unlikely to provide timely outcomes to support carrying these items as recoverable costs at this time.
"Accordingly, Downer has fully quantified and provided for these items in the provision noted above.
"Key elements that account for the projected cost overruns include:
- Design development and approval
- Material supply
- Time-related project overhead costs
- Project delay costs
"The provision includes a significant contingency and the assessment does not take up future benefits possible from:
- Order extensions to the RSM contract;
- Benefits generated by the $2.2billion (non-escalated) Through Life Support (TLS) contract;
- Any future commercial settlements.
"The first carriage set remains due for completion at the end of calendar 2010, and final sets are due to be delivered in 2013," Downer said.
Testing is progressing well, it said.
A regular review of Downer’s asset carrying values saw pre-tax impairments of $70 million ($66 million post-tax) incurred on the second half results.
Approximately $60 million of the charges are non-cash and will have no impact on cash flow, Downer said.
A goodwill impairment of $42 million relates to the Downer’s UK Works business due to economic conditions, and a $22 million charge relates to goodwill in the New Zealand consulting arm of Downer’s Engineering division.
There was a further $28 million impairment relating to past customer contracts in the Engineering division and movements in the carrying value of assets held for sale.
Downer said the provision and impairment charges represent ‘individually significant items’ and will be presented as such in the full year financial statements.
The company said its balance sheet and liquidity are strong with in excess of $500 million in cash and undrawn facilities.
And, as expected, the National Australia Bank has been given another six weeks to try to sort out a deal with the competition regulator over its plans to buy fund manager AXA Asia Pacific for $14 billion.
The NAB now has until July 15 to seek a resolution to the concerns raised by the Australian Competition and Consumer Commission which blocked the proposed takeover of AXA AP in mid-April.
NAB is understood to have proposed to the regulator that it would be prepared to sell AXA AP’s North platform in order to reduce its influence in that part of the sector.
Market reports suggest that either Tower or IOOF is the possible buyers.
Tower’s move to raise new capital late last week triggered speculation that it is a possible buyer, and a solution to the impasse in which the NAB finds itself.
The exclusivity deal between AXA’s French parent and the NAB ran out at midnight Monday and it could have opened the way for AXA AP to negotiate with AMP or another suitor.
NAB shares fell 29c yesterday to $24.34.
